Is ELSS Really A Good Choice As A Tax-Saving Investment?

As of now, there are more than 3000 mutual funds for retail investors to choose from. As an investor, if you have a very high risk appetite, are willing to remain invested for the long and are interested in a mutual fund scheme that can help you save tax and gain wealth over the long term then you can consider investing in a market linked scheme like Equity Linked Savings Scheme (ELSS).

Over the past few years, several taxpaying citizens have made ELSS their top tax saving instrument. To avail tax benefits and to bring down their tax liability during the fiscal year more and more individuals are opting for ELSS schemes.

As the name suggests, ELSS is an equity linked mutual fund scheme that also gives investors an opportunity to save tax. This tax saver fund invests the majority of its investible corpus in equity and equity related instruments. As per the rules set forth by capital market regulator SEBI, an Equity Linked Savings Scheme must allocate a minimum of 80% of its total assets to the equity market. The reason ELSS is also referred to as a tax saving scheme is that Section 80C of the Indian Income Tax Act, 1961 allows tax exemption for investments of up to Rs 1.5 Lacs.

One advantage that ELSS has over other equity funds other than the unique tax saving feature is diversification across market caps. ELSS fund managers do not have to worry about a company’s market capitalization when looking out for stocks. All they have to look for is stocks that offer value and growth and that can prove as an asset for the portfolio. Since the portfolio may comprise stocks from large to small caps spread across various sectors and industries, ELSS funds may offer true diversification. Also, these tax saving schemes come with a predetermined lock-in period of three years. ELSS investors cannot redeem their investments till the lock-in period is over. ELSS does not offer partial withdrawals but has the shortest lock in among other tax saving instruments.

Like all other equity mutual funds, ELSS are prone to the prevailing volatility in the market. However, it also has the potential to generate risk adjusted rewards in the long run. One of the easiest ways to mitigate investment risk in ELSS is through the SIP option. Systematic Investment Plan (SIP) is a simple and effective way to invest in mutual fund schemes like ELSS. Investors can invest sums as low as Rs 500 every month in ELSS through the SIP route. This way investors will not expose the entire investment sum to the inherent volatility. Investors can also make a lump-sum investment in ELSS; however, most salaried investors choose SIP as they are able to save tax and gradually build a long term corpus by making systematic and disciplined monthly ELSS investments.

ELSS funds can be a really smart investment move for taxpayers this tax season, but they need to ensure that they invest in the right type of ELSS scheme that has a track record for being a consistent performer. The key to long term wealth creation is choosing the right scheme that offers the much needed diversification and one that is ideal for the investor’s financial goal. Remember to invest in a scheme that can offer downside protection when the markets turn volatile and one that is able to generate returns across changing market cycles.

If you are new to mutual funds and aren’t sure about which ELSS scheme to invest in, do not hesitate to seek professional consultation.

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